Govt will need more public service cuts to fund tax plan

A further $1.5 billion in public spending could be cut, on top of $4 billion promised by National before the election, in order to make the Government’s tax cut package add up.

Newsroom reported on Tuesday that the tax package was $1.5 billion short of breaking even after policy changes were made during coalition negotiations and updated costings showed some measures would be more costly than expected. National campaigned on the tax package being self-funding, meaning it would raise enough revenue to cover the cost of the cuts without touching the Government’s bottom line.

On Tuesday, Finance Minister Nicola Willis reiterated that pledge. She also said there would be no changes to the costliest proposals – a $9 billion income tax cut scheduled to come into effect in July. With Prime Minister Christopher Luxon making clear at the same time that the Government wouldn’t be introducing new taxes, that leaves just one option to make it all work, economists say.

“Taking them at their word that the [tax cuts] will be fully financed, then yes, spending is the only thing that’s left for them,” former Reserve Bank board member Michael Reddell told Newsroom.

“There would have been plenty of opportunity for them three months ago to have eased off the interest deductibility, or you could have delayed the income tax cuts six months, you’d save $700 million out of doing that. But now, I think no, they’ve just got a choice, either more borrowing or more specific spending cuts.”

During a debate in Parliament in February, Willis tabled a document outlining the departments and spending lines eligible for cuts as part of the savings exercise – basically what National has deemed the public sector “back office”. Council of Trade Unions economist and policy director Craig Renney said that across the board cuts from those departments of 6.5 to 7.5 percent would net the Government $11.2 billion over four years.

The $2.4 billion in public sector cuts promised by National before the election, as well as the majority of the $1.6 billion in contractor and consultant spending cuts, plus the additional $1.5 billion in extra cuts now needed would come from that pot. Taken together, it would be $5.5 billion over four years or half of that $11.2 billion figure.

“That’s a very significant level of change in the overall level of government spending, particularly when you consider that what you may call the discretionary spend of government is much smaller than you think,” Renney said.

“Welfare takes up well over half of all government spending. There, there’s no cuts. That includes Super. Education and health take up a very significant part of the remainder of that. Then you’re left with 25 percent of all government spending, and then you’re seeing, well, there are some areas where you need to be quite careful – defence, police. So the areas that are discretionary that you can actually cut into becomes a smaller and smaller area.”

So while cuts of 6.5 or 7.5 percent may seem minor, it ends up being a major larger proportional cut of what’s actually in scope to be reduced.

Further complicating this is the fact that some “back office” spending cuts might not be able to be used for tax cuts. Willis has committed to “back office” cuts in health, education and police being redirected to the front line, for example.

“If you wanted to deliver more spending to health, to education and you want to redirect that spending, you can’t spend the same money twice. Necessarily, it can’t be used for tax cut purposes,” Renney said.

So what’s left over? Much of the spending that’s eligible to be cut is government activity that Renney said most people would view as frontline. The entire Customs budget, for example, is potentially up for cuts.

“Inside Customs, we have appropriations for goods clearance, revenue collection, traveller clearance, borders. There’s a range of things at the Minsitry of Defence, protection of New Zealanders for example. You look at search and rescue, land information systems. These would normally be things that are considered frontline services and if you want to ringfence those as part of any process to the cuts to public services, what that means is that the cuts to the rest of the public services have to get larger.”

Other line items may be “back office” functions that support the front line, Renney said.

“The ‘back office’ as it’s sometimes called is like the engine room for the front line. If you’ve got doctors filling out forms, if you’ve got teachers doing admin work, then they’re not teaching or they’re not delivering for patients,” he said.

“We have Fire and Emergency (public goods services), that’s all the things Fire and Emergency does to go around and warn people about fires, do training, maintain the daily fire risk warning. That’s not frontline but it affects the front line and it affects how many times the front line may be called out on. It gets very blurry very quickly.”

A first round of proposed spending cuts has already made its way to Willis’ office from agency chief executives. Asked about the proposals on Tuesday, she said she was happy with where they had landed, but wouldn’t say if that meant the cuts had come in higher than expected.

“We have had a range of proposals come through from government agencies. Some of them we won’t be progressing. Others of them look completely in line with our commitment to reduce backroom bureaucracy, to reduce consultant and contractor spend and to stop low-value programmes so we can push more money to the front line,” she said.

“We are progressing with our plans to do that.”

Could the Government find an innovative way out of this situation? Stopping contributions to the NZ Super Fund wouldn’t work, because those contributions are generally funded through borrowing. That would just be borrowing to fund tax cuts, but with extra steps.

Renney said the Government should take a step back and rethink its plans.

“It’s talked about a change in economic context, it’s talked about the public accounts being not as reliable and as strong as they previously had been anticipated, and so as a consequence, we might need to revisit our proposals in light of that.”

Michael Reddell still thinks the tax cuts could be funded, if the Government makes specific cuts to specific programmes, although he says the Government should be focusing on cutting the deficit rather than delivering tax relief.

“You’ve got to decide all the stuff you don’t want to do. You can cut out [the Ministry of Social Development’s] coffee plungers, that sort of thing. The small-scale stuff. Cut out some comms staff at the Reserve Bank, take out the first layer. Once you get beyond that, you’ve got to say, ‘This is stuff that we do not regard as a political priority to carry on spending at the present time’,” he said.

“There’s probably candidates for that, they all have their own constituencies and so they will all have their own political problems in deciding to cut. But that was the problem, the Nats went into the entire campaign more focused on the giveaways than finding things to take away.”